Indexing the tax system would raise wages for 2m workers but cost up to €1.1bn a year – The Irish Times
Indexing tax brackets and credits would increase the take home pay of up to 2 million taxpayers in the Republic while costing the government between €630 million and €1.1 billion a year to implement implemented, said the government’s high-level tax strategy group.
In its annual batch of articles aimed at informing fiscal policy, the group also noted that even partially protecting the poorest households from the current cost-of-living squeeze through the welfare system would be costly, up to to 1.1 billion euros in the event of an increase in all weekly social allowances.
In the paper dealing with income tax, the Tax Strategy Group (TSG) assessed the possibility of protecting the tax system against inflation by indexing income brackets and credits.
The fact that taxpayers here are tricked into paying significantly more tax when they receive a raise has long been a source of complaint.
The document calculated that indexing the income tax system at 3% per year would cost – in a full year – the Public Treasury 630 million euros, while indexing at a rate of 4% would cost 845 million euros per year. While this decision would benefit 2 million or 72% of “taxpayer units”, the indexation rates are well below the current level of inflation.
Alternatively, the group assessed partial indexation of brackets via a €1,500, €2,000 and €3,000 rise in the single standard income tax rate bracket, which it said would cost between €585 million euros and 1.14 billion euros per year, a decision that could benefit two-thirds or 66% of taxpayers.
“Income tax indexing is primarily the adjustment of tax credits and tax rate brackets in response to inflation and/or wage growth,” he said. stated, noting that the policy intent is to avoid tranche drift.
“Bracket drift can occur when inflation and/or wage growth push incomes toward the tax net or toward higher tax rates,” he said.
The group also estimated the impact of the new 30% income tax rate to ease the tax burden on middle-income people, an idea pushed by Tánaiste Leo Varadkar.
By international standards, workers here end up paying the highest rate of 40% at relatively low income rates – on anything over €36,800 for a single person.
The tax group estimated that a new rate of 30% on income between €36,800 and €41,800 would cost the public treasury around €525 million a year, while a rate of 30% on income between €36,800 €800 and €46,800 would cost up to €945 million. per year. However, he said a new 35% would benefit up to 1 million taxpayers in the Republic.
Government sources suggest Coalition ministers are in favor of widening tax brackets to a new 30% on the grounds that a new rate would add another layer of complexity to an already complex tax system.
In a separate social protection document, the group also cost a €15 hike in all weekly social benefits, as some opposition parties have demanded to deal with the current cost of living squeeze. to 1.1 billion euros.
A €15 increase would represent a significant change in rates, three times that of the increases in the 2022 budget, he said.
Alternatively, the government could opt for a €10 increase in weekly welfare rates combined with a targeted increase in fuel allowance for 370,000 low-income households at a similar cost.
Another document reiterated the government’s plan to scrap the 9% VAT rate for tourism/hotels next February, a move the industry will strongly resist.